After consolidating for a few days the bulls are out running again in full force and taking the indexes to new all time highs along the way. The Russell 2000, Dow Transports, S&P500, Midcap 400, & Dow Jones are among the indexes registering to new all time highs today. Based on the historical inverse correlation between the S&P500 and the VIX, one might expect the VIX to be moving lower today, perhaps dramatically so. However, that is not the case, as the VIX is actually up 3% today and was up as much as 5% earlier.
- Rising VIX keeps the contrarian bullish trade in tact
For weeks I’ve been talking about citing continued bearish sentiment (or at least not overly bullish) and a VIX that hasn’t made new 52 week lows as reasons to be contrarian bullish. While sentiment did turn more bullish last week, the VIX has not yet deviated from the bullish signals it continues to give in my view. Being that the VIX is a measure of puts to calls being purchased on the S&P500 30 days out, it is refreshing to see it higher on the day a new all time high is being made. Why? Because a higher VIX on a day like today implies that instead of traders being euphoric and chasing premium higher on SPX calls, they’re doing just the opposite: looking for hedges.
I am 100% convinced that the key ingredient to a impending market correction is a capitulation of the VIX, that is a sharp drop that takes it to new multiple year lows. At 12.90, the VIX is still 16% above it’s year-to-date low of 11.05. For those who prefer to cite the length of time the VIX has stayed at these historically low levels as a reason to be bearish, consider this: From December 2004 to May 2006 the VIX never moved above 20 and only moved above 16 on a monthly basis on 3 occasions. That’s a period of 17 months, recently the VIX has spent 5 consecutive months below 20.
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